Contract administration and design issues dog construction sector

This reflects a trend that we have seen develop over years and should prompt those working in the construction sector to invest in contract administration initiatives to protect their businesses.

Two studies whose reports were published this year agree with our view in relation to this trend.

First: the latest UK adjudication report produced by King’s College and the Adjudication Society covers the period between May 2023 and April 2024. Half of the adjudications in that period were driven, at least in part, by contract administration issues – up 8% on the previous year. It is impossible to put a figure on the commercial exposure arising from such failures, but it is likely to be significant: 42% of adjudications were for £1 million or more, and by far the most common type of claim at adjudication was the so-called “smash and grab” claim, where referring parties seek full payment of sums applied for due to the absence of valid notices from responding parties.

Second: considering distressed projects more generally, and not just adjudication: data from HKA’s seventh annual crux insight report underlines the propensity of contract administration to cause project losses. HKA’s report, which builds on the data from previous years, records that in Europe (including the UK), about 20% of construction disputes have involved “contract management and/or administration failure”. While the figure is lower than that brought out by the King’s College statistics, that might be explained by the forum: administrative disputes could be especially well-suited to adjudication.

Whatever the reason, the message is clear: contract administration is a blind spot in the UK. On a more positive note, this is a somewhat controllable risk where a relatively limited investment in procedures and risk management can have a transformational impact on the performance of a business.

Bad, late and incomplete design

Our experience suggests that bad, late and incomplete design is another major driver of disputes.  Pinsent Masons discussed this at length at the start of 2024 as part of our annual law review of construction.

The HKA data matches our experience that this “design-related trio” comprises the biggest drivers of disputes in the construction sector. There is a high strike rate of each as a driver of disputes:  incorrect design (21.5%), late design (21.3%) and incomplete design (19.8%).

While the first cause considered in this article - contract administration - is a concept that a businesses can largely control unilaterally, an industry-wide effort will be required to reduce design issues fuelling disputes in the construction sector. Two actions surface:

First: philosophical and perhaps political change is important. “Deal fever” must be guarded against – and no matter how useful it might be for construction to commence from an optical point of view, parties’ behaviour should instead reflect our strong experience, illustrated in works such as the excellent book “How Big Things Get Done”: that the projects most likely to be completed on time, within budget, and deliver the desired benefits are those whose design is mature before construction starts.

Second:  reflecting the first point - the way in which construction projects have traditionally been procured and constructed will have to undergo profound change if the sector is to reduce the frequency of design-related disputes.  It seems obvious, but anything that provides more time for design, and which might facilitate greater buy-in from all stakeholders prior to starting on site, must be the right thing to do.  There have been cries, for years, for more early contractor involvement, ‘elastic’ design periods, early supply chain engagement and more collaborative contracting, but there is an inertia in the construction sector that has stopped these initiatives taking hold widely.

Design-related disputes will not disappear on their own. With ever-increasing regulatory scrutiny, particularly around environmental targets and building safety, and as AI-powered design becomes more frequent, if the sector is not proactive, the “design related trio” will be back making headlines next year and in subsequent years too.